7/07/2010 @ 4:32PM

How To Kill The American Job

The American jobs machine is broken. That much isn’t in dispute. The June labor market report saw the creation of a paltry 83,000 private sector jobs. Over the same four weeks, an extraordinary 652,000 people left the workforce, swelling the ranks of the discouraged. Millions of potential workers are living on the margins of the mainstream economy. And this sad fact isn’t just a product of our recent economic woes.

That is at least one reason why Andy Grove’s essay in the latest issue of Bloomberg BusinessWeek–”How to Make an American Job“–has attracted so much attention. Grove, the legendary former CEO of
Intel
, has written a stirring manifesto for an industrial revival, one that uses blustery language to make the case for using trade barriers and subsidies to spur growth in manufacturing employment. During Grove’s tenure, Intel was among the world’s most feared and admired technology firms. Best known for the motto “only the paranoid survive,” the title of his bestselling memoirs, Grove is nothing if not paranoid. Rather than see the rise of China and other East Asian economies as a boon to global growth, he seems to see it as nothing but bad news for American workers, who must “fight to win” in the coming trade war.

One shouldn’t dismiss Grove’s arguments lightly. The decline of manufacturing employment really has coincided with a broader deterioration in the economic prospects of less-skilled American workers. Indeed, it’s hardly surprising that the collapse of the housing bubble would cause a spike in long-term unemployment. The construction sector drew heavily on the labor of less-skilled men who might have once turned to manufacturing work.

As construction jobs fade, the caring professions continue to grow. But the skills required of a home health aide, for example, are very different from those required of a bricklayer. Retraining is an arduous and expensive process, one that requires a level of social and cultural capital that many workers lack. This is the chief culprit behind the alarming decline in the labor force participation rate of men over the last three decades. When we consider that this decline has been concentrated among the non-college-educated and ex-offenders and other vulnerable groups, the picture looks even bleaker.

Grove describes his mission as rebuilding America’s industrial commons, and here he makes a compelling point. Manufacturing employment is part of a broader ecology. China has emerged as a workshop to the world not because of low wages–that advantage has long since eroded and will continue to erode in the years to come–but rather because the heavy concentration of manufacturing talent in regions like the Pearl River Delta gives China-based firms an edge in speed and flexibility. Manufacturing output in the U.S. in 2009 was $1.7 trillion, far surpassing China’s $1.3 trillion. Yet that gap is closing quickly.

America’s manufacturing output has been expanding while manufacturing employment has been shrinking due to dramatic productivity increases, a phenomenon that is also at work in China and other rapidly industrializing economies. One can easily imagine the U.S. embracing Andy Grove’s effort to rebuild the industrial commons–and watch as automation reduces the number of domestic manufacturing jobs even faster than the offshoring Grove decries. In the Pearl River Delta workers accustomed to demanding and repetitive tasks can be a highly flexible and relatively low-cost alternative to sophisticated machines. In the U.S., that equation would likely shift in favor of sophisticated machines.

Indeed, Grove’s us vs. them perspective ignores the many labor market challenges that China faces, the most pressing of which is the country’s skills mismatch. The armies of engineers produced by China’s colleges and universities, so intimidating to those who call for an American industrial policy, are having a difficult time finding work. China’s peerless industrial commons, meanwhile, has failed to deliver decent income growth for the large majority of Chinese households. Instead of enriching average Chinese, the country’s growing wealth has been plowed into countless white elephant infrastructure projects championed by powerful local officials. There is a real danger that Grove intends to lead the U.S. down the same destructive path.

Governments have historically done a very poor job of anticipating future job growth. Just as manufacturing employment has decreased, one can easily imagine the number of lawyers decreasing as new technologies emerge. At the same time, plumbers and nurses and other workers with skills that machines can’t easily replicate might find their wages, and their public esteem, on the upswing, as Paul Krugman anticipated in an ingenious essay first published in 1996.

The U.S. badly needs job and income growth. But it won’t come from the manufacturing sector. Rather, it will come from a wrenching series of labor market and entitlement and tax reforms designed to improve work incentives, most of which will prove far less popular than simply bashing China. While slight changes to marginal tax rates don’t have a huge impact on existing firms or currently employed workers, large cumulative increases in the tax burden lead to institutional and cultural shifts that are difficult to reverse: Firms become less likely to hire, workers take longer vacations and trade taxable income for leisure, overall spending levels grow slowly or flatten. Suffice it to say, this isn’t a recipe for rapid economic growth. This increased tax burden is necessary, however if we want the larger and more intrusive government we’d need to realize Andy Grove’s ambitions. Indeed, it seems entirely possible that Grove’s brand of industrial policy would destroy more American jobs than offshoring ever has or ever will.